Unprecedented turmoil in the financial services sector has forced corporate real estate (CRE) executives to create thoughtful solutions to squeeze costs from the portfolio with minimal disruption to the business. As expected, executives often use traditional tools (dispositions, sale/ leasebacks, etc.) to meet these ends.
While real estate is a significant cost, labor most often represents the largest, most influential element of overall operating spend. Therefore, enterprises have used layoffs to significantly lower operating expenses. As the economy improves, however, layoffs will likely decline. But further structural cost savings opportunities exist, in some cases with substantial returns, by reconfiguring operating footprints even as organizations grow their business in step with the recovery.
CRE executives are in a position to take an active role in cost-reduction initiatives because they are responsible for the enterprise operating footprint. Moreover, these executives are qualified to identify greenfield opportunities that fall outside of an existing footprint. Therefore, business leaders often charge them with leading efforts to reconfigure a footprint that better positions the enterprise for the long term. With this “seat at the table,” CRE executives are in a position to generate a significant positive impact to the organization. The rewards for implementing such a strategy can be substantial in terms of cost savings, improved image, operating efficiency and desired cultural change.
The primary drivers for organizations that reconfigure operations are:
- Cost Reduction: Lowering overall operating expenses is often the primary driver behind an initiative.
- Efficiency: Organizations often grow in multiple locations based on incremental decisions (mergers/acquisitions, localized influence, etc.) rather than as part of a broader strategy. As a result, there is ample opportunity to gain efficiency via consolidation. Conversely, companies that have outsized existing markets have opportunities to redistribute functions to lower-cost locations.
- Market Access: Access to revenue sources, internal customers and the right talent pools are critical for any long-term operating plan for the business to thrive.
Financial services firms, in particular, require special focus on the annual spend for talent and how that talent is organized to implement a successful strategy. Leading the effort to develop a justifiable plan requires CRE executives to collaborate with finance, human resources, operations, technology and C-suite leaders throughout an enterprise. In concert with traditional tools available, collaboration with appropriate stakeholders provides the input necessary to craft footprint solutions that create long-term cost savings and enhance business performance.
Why Are FinancialServices Firms Unique?
Financial services organizations vary widely in terms of size, structure, product type and competitiveness. However, they share a common set of attributes that shape how and where their business is distributed. A new operations strategy is typically driven by parameters and/or constraints that stem from these commonalities.
Consider the following measures:
- 70 percent: the percent of operating costs represented by labor
- 5.7 million: the number of jobs in the sector (US)
- 95 percent +: white collar employees
- Four years: typical higher-education requirements
- 25 percent: higher salaries than the U.S. average
These organizations depend on access to the right people and tend to be near peer companies that share their respective regional labor pool. Additionally, many firms have historic ties to mature markets with above-average market salaries. Therefore, the majority of jobs are found in a few high-cost markets.
Consider these figures:
- 77 percent: employment residing in high-cost metropolitan areas
- 33 percent: employment located in the top eight metropolitan areas But operations are not always configured to create the most effective performance. For example, not all processes need to be located in high-cost financial services centers. Additionally, there is often no need to have a redundant set of processes supported in an extensive number of locations. Finally, staffing models are too often overrepresented by an unnecessarily over-tenured and/ or top-heavy work force, which drives up annual operating costs. For these reasons, a strong case exists for examining the merits of reconfiguring operations.
Reconfiguration Challenges
Concerns regarding operational disruption, transition costs, process integrity and retention of key employees warrant careful evaluation during a footprint reconfiguration initiative. But sometimes these considerations create emotional, over-generalized responses from business leaders that impede evaluation of a new strategy. Knowing in advance what roadblocks are possible will help CRE executives be prepared to effectively address stakeholder concerns with a systematic, objective, data-driven decision process. Should the decision be made to investigate reconfiguration, there is a set of common challenges to be navigated in devising a new footprint solution.
While leadership tends to ask the same questions and share the same concerns with respect to an operating footprint configuration, opinions regarding the optimal solution can vary notably.
Typical challenges include those that are:
- Cultural: Resistance to change (conservative vs. risktaking).
- Logical: Differing opinions regarding the most effective operational design.
- Political: Individual interests vs. broad business interests.
- Practical: Justification of investment and buy-in.
A proven way to navigate through these challenges is to identify the most effective project team; interview all relevant stakeholders; document perspectives, concerns, consistencies and inconsistencies; facilitate discussions of findings for each step in the process; and keep stake-holders informed of the overall direction of the project.
Designing a Strategy
Although there are commonalities among financial services organizations, firms vary in size, structure, product type and culture. Therefore, each firm has a unique set of objectives and criteria to consider when designing a new strategy. CRE executives must frame for stakeholders the foundation for a plan based on multiple considerations, including overall rationale for change, evidence associated with which units are candidates for redeployment, justifiable logic for how an operational footprint should be configured, a schedule for implementation that minimizes disruption and which locations are best suited to support long-term operations.
Successful facilitation of the decision process rests on answers to basic questions:
- Why reconfigure? Setting cost and efficiency objectives via stakeholders significantly influences parameters.
- What processes are candidates for deployment? The value added and location dependency of processes determine whether they are candidates for deployment.
- How should the platform be configured? Economies of scale, process efficiency, culture, pace of implementation and continuity of business are key considerations that influence whether operations should be consolidated or distributed.
- When should the strategy be implemented? Practical real estate constraints such as lease expirations influence when a strategy should be implemented. Organizations may also opt to redesign a process before or after a physical move takes place.
Where are the best locations? How an organization chooses to compete for talent and the importance of accessibility to internal and/or external customers influence the final location selection.
The input from appropriate stakeholders results in a spectrum of footprint scenarios. These scenarios are tested by weighing transition and recurring costs against perceived risks associated with each.
Choosing Locations
The end game for a new operational strategy is deciding where to implement the agreed-upon operational configuration. Although it is common for individuals to want to jump ahead and select attractive locations that seem appropriate for particular business processes, it is far more effective to first establish the operational strategy before homing in on a final set of locations. Once a direction has been established, choosing a location(s) is dependent on two primary factors — what skills are needed and how the organization plans to compete in a local labor market. An organization’s talent management strategy feeds directly into the ultimate location configuration strategy.
Compensation, rampup schedules, the level of experience required for new hires and the extent to which new employees have internal mobility opportunities help define how an organization will manage talent in a new location(s).
The location configuration strategy is guided first by deciding the desired market position of the organization and then measuring appropriate characteristics across potential markets. There is no one-size-fits-all location; therefore, selected locations often differ based on the preferred footprint scenario. For example, because of its concentration of technical talent, Raleigh may be a region that supports an IT function, Nashville may be suitable to host shared service and call center functions, and Dallas may host multiple functions because of its more balanced economy.
It Makes Sense
The reasons for financial services CRE executives to pursue a new operational footprint hinge on the desire for increased savings, improved efficiency and market access. Financial services organizations have a unique set of attributes, primarily because of the scale of white collar and professional skills required to keep the business running smoothly. Yet even though processes are often rooted in locations for historic reasons, convincing unit leaders that candidate processes are not necessarily fixed to existing locations can create challenges.
Challenges can be overcome by implementing a systematic decision process that assembles an effective project team, solicits input from all appropriate stakeholders, provides objective documentation of consistencies and inconsistencies across business leader perspectives and keeps stakeholders informed of the direction of the strategy from concept to implementation.
The design itself requires multiple considerations, including cost and efficiency objectives, selection of business units, labor market positioning, geographic and regulatory constraints, platform configuration and implementation schedules. Then choosing one or more locations requires finding the right match between the organization’s recruiting strategy and a labor market’s attributes.
Successfully implementing a new operational design is achievable with careful planning, and the rewards can benefit an organization by lowering structural operating costs, consolidating into strategic location(s), establishing operations in a location with a broad and deep talent pool and/or strategically positioning the organization near customers or regions of the future.
Editor’s Note
Scott Redabaugh and Jim Eskew were both with Cushman & Wakefield when they co-authored this article.
About the Authors
Scott Redabaugh is a Managing Director in Jones Lang LaSalle’s Strategic Consulting Group.
Jim Eskew is a Vice President in Jones Lang LaSalle’s Strategic Consulting Group.
